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Canadians File Suit To Block FATCA And Prohibit Handover Of U.S. Names To IRS

A lawsuit has been filed by several Canadian citizens against the Canadian Attorney General in Federal Court in Canada. The legalclaim challenges the constitutionality of the agreement the Canadian government struck with the United States. The controversial deal between nations was inked under FATCA—the Foreign Account Tax Compliance Act.

FATCA is America’s global tax law. More than 80 nations have signed on to the U.S. law, so what’s the big deal about Canada? Many Canadians are still hopping mad that their own government bowed to pressure from the south. The Canadian plaintiffs hope to stop the Government of Canada from turning over private bank account information from more than one million United States persons and their families, living in Canada.

The FATCA agreement between Canada and the U.S. calls for such data–a kind of public outing–to be handed over to the IRS. Joseph Arvay, QC, and David Gruber, both of Farris, Vaughan, Wills & Murphy LLP in Vancouver, are representing the plaintiffs. There’s been talk of such a suit for years, but now the gloves have come off and the case is public.

FATCA is controversial, though it was passed quietly in 2010. Now that it has finally taken effect, it requires foreign banks to reveal American accounts holding over $50,000. Non-compliant institutions could be frozen out of U.S. markets entirely, so everyone is complying. FATCA Is Everywhere — Even Russia & China. And that includes Canada.

So far, 77,000 financial institutions have registered and 80 countries have too. Countries must throw their agreement behind the law or face dire repercussions. Tax havens have joined up. Even China and Russia are getting on board. To see which financial institutions are participating, see FFI List Search of and Download Tool and a User Guide. Countries on board are at FATCA – Archive.

FATCA grew out of a controversial rule. Unlike Canada and virtually all other countries, America taxes its citizens—and even its permanent residents—on their worldwide income regardless of where they live. In 2009, the IRS struck a groundbreaking deal with UBS for $780 million in penalties and American names. Yet today, that huge deal seems only a drop in the bucket of what has happened since.

Credit Suisse took a guilty plea and paid a record $2.6 billion fine. Moreover, there are now over a hundred Swiss banks taking a DOJ deal that requires American depositor names. In short, banking is more transparent today than could ever have been imagined.

FATCA was enacted in 2010, when only some of those developments were beginning to unfold. The idea was to root out Americans. To do it, FATCA cuts off companies from access to critical U.S. financial markets if they don’t play ball and pass along American data.

For some in Canada, this still doesn’t sit well. There is some anger that the U.S. went so far, and some disappointment that the Canadian government didn’t resist. The Plaintiffs in the Canadian lawsuit are Virginia Hillis, a retired lawyer from Windsor, Ontario, and Gwendolyn Louise Deegan a graphic designer in Toronto.

The legal claim is that the agreement to implement FATCA between Canada and the United States violates provisions of the Canadian Charter of Rights and Freedoms. That’s the document enumerating the right to life, liberty, security of person; security against unreasonable search and seizure; equal protection of law without discrimination. That’s a serious charge. So is the contention that the FATCA agreement flies in the face of the “principle that Canada will not forfeit its sovereignty to a foreign state.”

The Canadian citizen plaintiffs claim to be entrapped in U.S. citizenship. They were both born in the U.S., but left the U.S. at age five to live in Canada. They never obtained a U.S. passport or developed meaningful ties with the U.S. Even so, the case says they are considered ‘tax cheats’ by the U.S. because they are not ‘IRS compliant.’

“I am a proud Canadian. Why is my government branding me with being a potential U.S. tax evader merely because of my place of birth – and turning my personal information over to a foreign government’s jurisdiction?” said Ms. Hillis. Ms. Deegan says “This was not the Canada our brave Fathers of Confederation envisioned. FATCA destroys our unity and we cannot permit the loss of our sovereignty.”

This lawsuit is accompanied by a separate submission of a complaint to the United Nations, by concerned citizens worldwide, that the unique U.S. style ‘place of birth taxation’, for which FATCA is an enforcement tool, violates fundamental human rights. Who is funding this? The Alliance for the Defence of Canadian Sovereignty (ADCS), though it appears donations are coming from many.

According to that organization, “Many of our donors are pensioners who have little savings, and we need the support of those who can afford larger donations to fund this case, expected to go to the Supreme Court of Canada” said Dr. Stephen Kish, ADCS Chair.”

You can reach me at Wood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

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According to the Economist about FATCA: “America’s new law on tax compliance is heavy-handed, inequitable and hypocritical. http://www.economist.com/news/leaders/21605907-americas-new-law-tax-compliance-heavy-handed-inequitable-and-hypocritical-fatcas-flaws/

According to The Wall Street Journal: “Fatca rules were intended to correct a tax loophole. Applied to Americans living abroad, they are absurd.” http://online.wsj.com/articles/kuenzi-american-expats-tax-nightmare-1404924705

The Wall Street Journal reports that FATCA worsens the already profoundly unjust tax treatment of millions of middle-class Americans living abroad [Why isn't the U.S. government listening to these authorities?]

How does FATCA worsen the already “profoundly” unjust tax treatment of those living abroad? * Extra compliance (including 8938) and compliance cost with confusing rules that change every year requiring extensive tax consultation. * Extra over the top penalties. Imagine getting 30% of your account balance seized if some form is not reported right. Then 8933 penalties are added to FBAR penalties. * Limitations on entrepreneurship and advancement: if you can sign for a company over seas, perhaps in the country in which you live, the IRS wants all the account details and balances reported, else your company faces overthetop penalties.

All this is added on top of excessive compliance, double taxation, and restrictions on normal living. Just have a look at sections 76 and 77 of the claim and these also deal with the discrimination of the U.S. system of Citizenship Based Taxation: g) “may be denied many retirement planning and investment opportunities or other tax advantages available to Canadians of any other citizenship or national origin” d) “may be inhibited from progressing in their careers.”

What U.S. citizenship based taxation (the amount of the double tax, the double tax itself, the compliance time and expense required, the preventing of having a normal life with equal opportunities in the country they live, discrimination against the foreign families of U.S. citizens), what U.S. Citizenship based taxation represents is uneven and discriminatory observance of the declared inalienable rights of Americans to liberty and the pursuit of happiness, for Americans living abroad compared to Americans living in America.

The U.S. Constitution makes no such distinction between Americans living in America and those living abroad – and therefore, their treatment by the U.S. government should be on an equal basis. There is substantial double taxation and onerous penalties without representation. What is needed now is an affirmative action program by the U.S. government to right and overcompensate for the discrimination represented by its policies against Americans living abroad – to treat them more like humans and Americans rather than property.

Plus the U.S. should stop interfering in the internal affairs of other countries, through instigation of discrimination against US citizens living overseas – who happen to be citizens and tax residents of those countries.

Calm down, JC. One can still register a corporation or business in another country and not be required to report to the US treasury. Go Canada! I am a US citizen who lives in a place six months out of the year where many Canadians do the same. Still, your points are valid. It is not hopeless and as mighty as we believe we are in the US, as much as we like to believe that we rule the world and the world asks how high do I need to jump, we are not the world and avenues will always exist that the US cannot touch. Thank goodness for that. One just needs to educate himself as to what alternatives are available and how to navigate them. As is often the case nowadays, Canada is doing the right thing.

FATCA isn’t the only broad law, of course. Yet as you note, it has had an extensive impact on US persons abroad. I’m not familiar enough with how cases of this sort generally proceed or are resolved in Canada to project what may happen next. I suppose even if the case goes extremely well, FATCA and everything else about the U.S. tax and reporting system will remain unchanged.

One small point. You may be right that one can still register companies or own something and slip between the disclosure cracks. But I think the new wisdom is that the safest course is to disclose literally everything. It is the old better safe than sorry idea, in light of penalties. They can be draconian.

I know I am making a silly observation about one tiny aspect of FATCA, but here goes. I wonder if anyone will actually pay the 30% withholding? That is, it appears that everyone is doing everything possible to avoid that result. That is surely what FATCA was designed to do. Sort of like an excise tax that is never collected because the behavior targeted by the excise tax changes. Just a thought.

I think you are viewing this from the point of view of the banks and their behaviour changing. What types of changes will occur from the blow back of countries not thrilled about being extorted and the huge ongoing compliance costs, when that promised reciprocity never occurs?

Just maybe that 30% withholding will never occur because there will be nothing to withhold it from. Either the banks divest or their will be no US branded folks living abroad left to report.

We have a critical mass of those deemed by the US to be ‘US taxable persons’ including duals from birth in Canada, from birth in the US of Canadian parents, those who naturalized, snowbirds, etc. The second largest population of those affected, after Mexico.

There are other parliamentary democracies with similar Constitutions, Human Rights and civil rights laws. Note for example that Australia enumerated some of the foreseeable human and civil rights conflicts http://www.austlii.edu.au/au/legis/cth/bill_em/tlaotfab2014510/memo_0.html see Chapter 2 ‘Statement of Compatibility with Human Rights’ pg 21, but signed the IGA despite knowing of the significant conflict. The US is criminalizing the legal local transparent (and interest already taxed or reported to our own domestic tax agency the CRA) savings of those living outside the US, and treating their family and business accounts as presumed criminally suspect before the fact – merely by virtue of them not being located in Delaware or Florida or Texas or Nevada. We don’t live in the US. We don’t receive income or benefits or have an economic relationship with the US. Might makes right doesn’t justify what the US is doing by claiming the ‘right’ to tax people abroad merely on the basis of birthplace or parentage.

Using threats to manipulate Canada and the rest of the globe is not admirable, credible, or acceptable foreign or fiscal policy and does not constitute the much touted ‘multilateral’ ‘cooperation’ towards resolving tax and financial issues that the US State and Treasury pretends. FATCA has been referred to as a nuclear bomb to the international financial system. Is that how the US wants to be known? Particularly suspect since the IGAs were signed without Congressional approval, and there is robust legal reason to believe that they have no legal basis. See Friday, July 4, 2014 ‘IRS claims statutory authority for FATCA agreements where no such authority exists ‘ by Prof Allison Christians (McGill) Tax, Society $ Culture blog http://taxpol.blogspot.ca/2014/07/irs-claims-statutory-authority-for.html The US FATCA emperor has no clothes. And the ‘withholding’ is very likely to be illegal under treaties like the WTO and NAFTA.

That is however, if the US cares about ethics, justice or even the APPEARANCE of a commitment to internationally accepted principles.